Insurance companies have no duty to defend or indemnify owners of insurance policies who commit criminal acts when such policies contain exclusions for criminal activities. Insurance companies do, however, have a duty to indemnify policy owners who injure others so long as the act is not "inherently harmful" or the insured did not "intend" to cause the resultant harm.
After a night spent drinking alcohol and smoking marijuana in his grandmother's cabin, Joseph France picked up a shotgun, believing it was unloaded, pointed it at Plaintiff, and pulled the trigger. The gun did not fire and Plaintiff jokingly admonished France. France then pulled the trigger again and the gun fired, injuring Plaintiff. France pleaded guilty to the felony of assault in the second degree (Penal Law " 120.05(4)) and Plaintiff sued France for negligence. France claimed that because Defendant, Security Mutual Insurance Company, had issued a homeowner's policy for the cabin, it had a duty to defend France in the negligence action. Defendant denied that it had a duty to defend or cover France and the Supreme Court entered a default judgment for Plaintiff. Plaintiff then commenced an action against Defendant and France, seeking a declaration that Appellant had a duty to defend and indemnify France. Because the policy had exclusions for both intentional and criminal acts, Defendant argued that France's act was not covered under the policy. The exclusions specifically stated that the policy did not cover liability for acts "caused intentionally by or at the direction of any insured." or for liability "arising directly or indirectly out of instances, occurrences or allegations of criminal activity by the insured." The Supreme Court granted summary judgment for Plaintiff and the Appellate Division affirmed, holding that the intentional act exclusion did not apply to France's act and that the criminal activity exclusion was unenforceable on the grounds of public policy. The Court of Appeals affirmed regarding the intentional act exclusion and reversed regarding the criminal activity exclusion, holding that the exclusion was enforceable.
1. Whether an intentional act exclusion in a homeowner's insurance policy should be enforced to deny coverage where the insured shot an individual with a gun he believed to be unloaded.
2. Whether a provision in a homeowner's insurance policy excluding coverage for injuries resulting from direct or indirect acts of criminal activity by the insured is unenforceable as a matter of public policy.
1. No. For an insurer to be alleviated from liability for injuries resulting from an insured's intentional act, the act must be intentional or inherently harmful.
2. No. A contractual provision alleviating an insurer from liability from harm resulting from criminal activity by the insured is enforceable, as there is not a strong public policy or statute requiring such coverage.
Courts have struggled with the validity of criminal activity exclusions in insurance policies. One factor the courts have looked at is whether the incident which invoked the criminal act exclusion was a serious crime or was better classified as a lesser statutory infraction. If a broad criminal act exclusion, like the one at issue here, facially applied, the courts may rule that the act involved little actual culpability and thus determine that the exclusion does not apply.�� One factor the courts look at is the insured�s plea to the criminal act in question. A guilty plea can indicate that the victim�s injuries were directly caused by the insured�s criminal act, thus allowing the insurer to avoid coverage under a criminal act exclusion. See Green v. Allstate Ins. Co., 172 A.D.2d 949 (N.Y. App. Div. 1991).�
The precise language of the criminal act exclusion can play an important role as well. In Allstate Ins. Co. v. Zuk, 78 N.Y.2d 41 (N.Y. 1991), the insurance policy in question excluded coverage only for those injuries �which may reasonably be expected" (emphasis omitted) to result from the criminal acts of the insured.� The Court of Appeals ruled that, although the insured pled guilty to second degree manslaughter, he was not collaterally estopped from denying the injury was �reasonably expected." Consequently, drafters of insurance policies quickly omitted references to reasonably expected results and amended their policies accordingly.�
While competing public policy concerns affect both sides of the issue, courts are generally reluctant to decrease freedom of contract by finding insurance contracts violative of public policy. When they do find a violation, they typically construe it narrowly to cover only a certain type of insurance.� See Lane v. Sec. Mut. Ins. Co., 96 N.Y.2d 1, 6 (N.Y. 2001) (holding an exclusion unenforceable but only as applied to fire insurance). Additionally, it is acceptable for insurers to limit their contractual liability as long as the coverage meets certain statutory minimum standards. Suba v. State Farm Fire & Cas. Co. 114 A.D.2d 280 (N.Y. App. Div. 1986); Insurance Law " 3404(e); Insurance Law " 3420(a). Finally, insurers are free to cancel coverage if the insured is convicted of a crime that relates to the incidents insured against. Insurance Law " 3425(c)(2)(B).�
The Court stated that an intentional act exclusion in a homeowner�s insurance policy does not apply unless either the insured intended to cause the resulting injury or the injury was �inherent in the nature" of the insured�s wrongful conduct. See Mugavero, 79 N.Y. 2d at 161. The Court construed the meaning of �intentional" narrowly within the context of an intentional exclusion provision, thereby requiring �more than a causal connection between the intentional act and the resultant harm" to demonstrate that an injury was intentional. See id at 160. Moreover, conduct is not inherently harmful simply because it is reckless or dangerous. The Court held that Defendant�s intentional exclusion provision did not apply as France did not intent to harm Plaintiff and his conduct was not inherently dangerous.
The Court�s holding limits the scope of those injuries that an insurer may exclude from coverage in a homeowner�s policy with an exclusion for intentional acts. Even with such exclusionary provisions, insurers have a duty to indemnify for injuries that occur accidentally from an insured�s intentional act, even if the conduct is negligent or reckless, so long as the injuries are not unavoidable results of the insured�s conduct and such conduct is not �inherently harmful."
The Court held that the broad language in Defendant�s policy excluding coverage of all injuries resulting from criminal conduct was enforceable. In so holding, the Court expressly declined to follow the case law in other jurisdictions, which apply a �reasonable expectations" standard that limits the ability of insurers to broadly exclude certain acts as such broad exclusionary language is contrary to the reasonable expectations of policyholders. Tower Ins. Co. v. Judge, 840 F. Supp. 679, 692-693 (D. Minn. 1993). However, other jurisdictions have not construed such criminal activity exclusions to require a reasonable expectations standard. See Allstate Ins. Co. v. Norris, 795 F.Supp 272 (S.D.Ind. 1992); Allstate Ins. Co. v. Juniel, 931 P.2d 511 (Colo. Ct. App. 1996). The Court would not apply the reasonable expectations standard because the exclusion was neither surprising nor unfair, and without a strong public policy requiring such a standard, the Court did not want to interfere with the parties� freedom to contract.
The Court held stated that New York insurance law does not require insurance companies to indemnify �the full panoply of coverages known as homeowner�s insurance." Thus, absent public policy concerns, an insurer may exclude direct and indirect criminal activity from coverage. See Insurance Law " 3425(c)(2)(b); see also Suba, 114 A.D. 2d at 284. The Court held that New York insurance law facilitates insurers' ability to exclude coverage to persons who commit crimes. Public policy does not preclude insurers from excluding such wrongful conduct from homeowner�s insurance. Therefore, the holding broadens the scope of criminal activity that an insurer may exclude from coverage under a homeowner�s criminal activity exclusion provision.
The Court determined that the intentional act exclusion did not apply because pointing a gun at a person and then pulling the trigger was not �inherently harmful" as the gun could have been unloaded. However, the Court did not specify what types of acts would qualify as �inherently harmful." It is not clear whether the act would have been inherently harmful if the gun had been purchased illegally or was an automatic weapon. Further, the Court said that more than a causal connection between the harm and the act is required in order to prove that the harm was intended. The Court did not draw the line between a mere causal connection and an intentional act and did not specify whether an individual must act with knowledge or just mere recklessness for an act to be intentional.
The Court stated that a case may arise where an exclusion for criminal activity would apply, but would result in injustice. However, the Court did not specify the type of circumstances under which injustice would occur by enforcing a criminal activity exclusion.
The Court�s decision regarding the intentional act exclusion is largely in accord with other jurisdictions.� Generally, courts have construed similar exclusions to require more than an intention to perform the harm-causing act. Rather, for the exclusion to apply, the insured must intend the actual harm or act in an inherently dangerous manner. See e.g., J.C. Penney Casualty Ins. Co. v. M.K., 278 Cal.Rptr. 64, 69-70 (Cal. 1991) (stating that intention may be inferred from conduct); Western Mutual Ins. Co. v. Yamamoto, 35 Cal.Rptr.2d 698 (Cal.App. 1994) (holding that the exclusion was applicable where the harm was intended).
As the Court noted, there is disparity among jurisdictions regarding the applicability of criminal activity exclusions. Some jurisdictions favor a narrow application of criminal act exclusions, thus requiring coverage for unintentional criminal acts but excluding intentional criminal acts. See e.g., Graham v. James F. Jackson Assoc. Inc., 352 S.E.2d 878 (N.C.App. 1987) (holding that the policy covered liability arising from involuntary manslaughter). Courts in these jurisdictions have based their decisions on the public policy consideration of allowing innocent victims to recover, coupled with the opinion that criminal act exclusions may often defy the insured�s reasonable expectations. See e.g., Young v. Brown, 658 So.2d 750, 754-55 (La.Ct.App. 1995).
Other jurisdictions, however, have held that countervailing public policy considerations such as limiting indemnification for criminal actors and the unambiguous terms of an agreement require enforcement of such exclusions. See e.g., Allstate Ins. Co. v. Burrough, 914 F.Supp. 308 (W.D.Ark. 1996); Allstate v. Norris, 795 F.Supp 272 (S.D.Ind. 1992); Allstate Ins. Co. v. Peasley, 910 P.2d 483 (Wash.App. 1996); see generally Hooper v. Allstate Ins. Co., 571 So.2d 1001 (Ala. 1990) (citing sister state judgments).� Although there are distinct differences between the jurisdictions, some of this disagreement may be attributed to the varied interpretations given to similar -- but not equivalent -- language in insurance exclusions, rather than to doctrinal differences.
Prepared by:
Sarah E. Harris �04
Zachary Krug �04
Laurie Morrison �04
Lindsay Silber �04
Ben Zeliger �04